The Best Investing Advice for 2019 From Fortune’s Experts

The economy and the stock market don’t always march in lockstep, and investors got a sharp reminder of that fact this fall. Parade-and-fireworks-worthy GDP growth and employment numbers shared the spotlight with an ugly market slide that took some previously beloved stocks into bear-market territory. Fears about inflation and trade tensions were among the culprits; so was the pervasive sense that the U.S. bull market, nearly 10 years old, can’t last much longer. (For more, see our August cover story, “The End Is Near.”) So which companies will be able to deliver standout returns as the market’s mood gets more downbeat? To answer that question, Fortune convened our annual roundtable of investors.

FORTUNE: With growth strong and unemployment low, it’s hard not to feel that we’ve reached the peak of an economic cycle. So what comes next? Is it a gentle slowdown or something more severe?

KATE WARNE: We may be at the peak growth rate, like we saw in the second quarter with growth above 4%. But many of the factors that have kept the economy growing and have kept the unemployment rate falling remain in place. We do expect growth to fade a bit as tariffs bite, and the impact of the tax cuts from this year won’t be as strong next year. But we don’t see this as some kind of peak. Think of 2019 as part of this long, extended expansion.

FORTUNE: Are there adjustments you’re making to adapt to that more gradual change?

WARNE: As we get late in the cycle, we need to own more fixed income to protect against volatility. On the equity side, I’d look at companies that have pricing power. We’re seeing cost pressures from higher tariffs and from some of the shortages and bottlenecks in the economy. Companies that can pass on whatever higher costs they see are much better positioned at a time like this. In the medical space, for example, you’ve got Novartis(NVS), which has the ability to keep raising prices, though of course we’ve got concerns about regulation on that.

JOHN LINEHAN: Typically bull markets don’t die from old age. But they will die from either a recession or speculative excess. And right now we really don’t see either, although you start to see warning signs in both.

Over the longer term, higher-yielding ­dividend-paying stocks have outperformed the market and have offered an attractive source of return. We think they are very attractive for a balanced portfolio. Right now we’re attracted to some of the higher-yielding stocks, which we think the market isn’t properly giving investors credit for—in fact, the market is actually pricing in a downturn. But if we don’t believe a downturn’s going to occur over the next year, there’s some real opportunities. International Paper(IP), which pays almost a 5% dividend yield, has broad cyclical exposure.

Another would be Las Vegas Sands(LVS), which has very strong secular growth prospects, given its position in Macau and Singapore. There’s a lot of investor concern around what’s going on in China—rightly so. But the secular dynamics are there longer term for Macau. And you’re also getting paid over 5% to wait.

FORTUNE: You mentioned speculative excess. Open question for the table: Are you seeing valuations you associate with prices going too far?

Reed Young for Fortune Magazine

“We expect growth to fade, but we don’t see this as a peak. Think of 2019 as part of a long expansion.” Kate Warne, Edward Jones

ED SIM: From a venture capital perspective, I’ve been in the business since 1996, and I’m seeing some excessive pricing. The amount of capital being invested in the market in the late stages is absolutely incredible. [Financing rounds of] greater than $100 million accounted for at least half of the $28 billion of U.S. domestic venture capital investment for Q3. So when I’m seeing pricing around 15 to 20 times 2019 revenue numbers, I start getting worried a bit. That, in my mind, is a sign of excess in the markets. And I fear what may happen, let’s say, in 2020.

FORTUNE: Is the IPO market also overpriced?

CATHERINE WOOD: In the public markets there’s been a move toward passive strategies. And at the same time, there’s been a search for innovation in the private space, the pre-IPO world. You have this crowding into the private world. So we think the most undervalued part of any equity market is innovation in the public equity market. We do see many IPOs that fall flat because they’ve just had one or two too many “up” rounds in the private space. But we see incredible bargains in the public space.

Many people will make fun of me when I say this, but you have Tesla(TSLA), for example, which we think, long run, is primarily a mobility-as-a-service play. Right now, it’s selling for two times trailing revenues, so it’s valued at $45 billion vs. $20 billion in sales. Had Tesla remained private, it would have a much higher valuation.

FORTUNE: You’re all looking for factors that drive strong performance regardless of the economy.

LORI KEITH: For us, it’s really important to consider environmental, social, and governance [ESG] factors. We’ll never put capital to work in a company that has only a good fundamental story. By the same token, if it is only a positive ESG story without strong business fundamentals, that would not be a focus for us as an investment. We’re really all about the idea of delivering on principles and performance.

Historically, [ESG investing] has mostly meant screening out the bad actors—companies that have exposure to things like alcohol, tobacco, nuclear power, gambling, and weapons manufacturing. But today, we’re hitting an inflection point where we’re recognizing that a positive emphasis on ESG factors has a material impact on the long-term performance of a company.

“If you see interest rates creep higher, the impact on the economy at some point could be very injurious.”John Linehan, T. Rowe Price

FORTUNE: Tesla must be a tough call right now because environmental benefits are central to its mission, but governance-wise, it’s had issues …

WARNE: We don’t follow Tesla. But part of the reason is, their debt’s junk rated. We wouldn’t look at it until it becomes investment grade. In general with companies, we’d look at the credit rating before we even look at other characteristics. We’d rather be later and not have quite as high returns but wait until the cash flows are more stable and bondholders can be a little more comfortable.

WOOD: What we’ve seen with visionary leaders leading innovation, whether it’s Jeff Bezos or Steve Jobs or Elon Musk, is behavior that is really born out of the frustration associated with short-term thinking in the ­equity markets. And they just don’t understand how we can’t understand.

If you look at the investment itself, what’s going to make Tesla move is a three-year lead in chip technology, battery technology, and data collection. And there’s also the concept that is going to get it catapulted into the world: mobility as a service, which many companies are just starting to think about.

FORTUNE: And you don’t necessarily have to sell 10 million Model 3s a year to make money from that technology.

WOOD: The Tesla Model 3 is the No. 1 selling car in the United States if you measure by revenue. Think about that. It’s never advertised. They’re doing something right.

FORTUNE: Catherine, you touched on a conflict that preoccupies us at Fortune, which is when long-term management goals are undercut by short-term thinking in the markets. I’d love to hear from everybody: What are long-term holdings of yours that are being beaten up by short-term noise?

LINEHAN: Our turnover is about 20% a year. And when we make an investment, we are really thinking about a five-year investment time horizon.

There are a number of companies where we think that the market’s not reflecting either the franchise value or the asset value of the company for the long term. That often occurs when companies are undergoing some controversy. Wells Fargo(WFC) has been very beaten up, and you’ve seen its multiple compress significantly relative to its peers. But if you take a step back and think in the context of three to five years from now, it’s still got a very strong franchise, a very defensive business model. It historically has traded at a premium valuation. And we think over time, the issues surrounding Wells Fargo are correctable.

Another name we like a lot would be DowDuPont,(DWDP) where the market’s very focused on its exposure to a cyclical downturn. We’re attracted to the fact that the company’s going to split into three different segments in the next 18 months. If you look at comparable peer valuations for each one of those companies, DowDuPont trades at a very significant discount to that. As a sum-of-the-parts story, it is very compelling.

KEITH: One company I’d highlight is Xylem(XYL), the largest pure-play water infrastructure company globally. It’s become a little bit out of favor due to headwinds from cost inflation. It’s also been hurt by tension over tariffs with China because it does manufacture there and sells into that market. But we think those are transitory issues, because when you look at the long-term trends associated with water treatment, water quality, we’re seeing a tremendous opportunity.

Take the existing infrastructure here in the United States. There’s a very long-tail runway of capital spending that needs to occur in our own municipalities. Internationally, there’s a significant opportunity for greenfield projects around creating new water systems. And with Xylem having the dominant share in this market, they have very strong pricing power.

Reed Young for Fortune Magazine

“Many IPOs fall flat because they got overvalued in the private space. But we see incredible bargains in the public space.” Catherine Wood, ARK Invest

SIM: I’m not a public market investor per se, but one stock that I know pretty well is Vonage(VG). And I think it’s interesting because there’s an AOL-like cash flow part of the business that’s residential [voice over Internet]. But there’s another, super-fast-growing part of the business, which is driven by APIs [application programming interfaces, platforms for building new software]. Vonage bought a company called Nexmo, and the growth on the API side from Nexmo is absolutely incredible. There’s value to be had if someone can figure out the different value of the pieces there.

FORTUNE: Catherine, what are the biggest technological changes you see hitting larger companies over the next couple of years?

WOOD: We’ve centered our portfolio around disruptive innovation. That’s all we do. And there are five multitrillion-dollar platforms evolving right now. DNA sequencing, which is leading to Crispr and other breakthroughs. Robotics, which is being turbocharged now by collaborative robots, so that’s Teradyne(TER). You’ve got energy storage, that’s certainly Tesla; they’re leading the charge, so to speak, there. There’s artificial intelligence—Nvidia(NVDA) is the artificial intelligence chip company. And then there’s blockchain technology.

These platforms are actually converging. You can see it in autonomous taxi networks. Autonomous vehicles are robots. Energy storage: The taxis will be electric. And they will be powered by artificial intelligence. China is going to be the biggest market. Baidu(BIDU) has been deemed by the Chinese government the autonomous driving platform of choice. So they’re going to get a slice of everything that happens in that very large market. And ­Tencent(TCEHY) is a 5% owner in Tesla, so it’s got its nose under the tent there.

FORTUNE: There’s been a lot of concern of late about a slowdown in China’s economy. Kate, how does China shape your thinking right now?

WARNE: The emerging-markets indexes overall are in a bear market. So anytime something hits that 20% decline, you need to say: Is this going further, or is this a buying opportunity because the valuations have gotten cheap?

Many people are looking at places like Argentina or Turkey and saying, “Oh, all emerging markets are this way.” Well, no, ­emerging markets have really shifted to be more China-focused, more tech-focused. And if you see that growth continuing, as we do, then emerging markets look like an opportunity. You don’t worry too much about the fact that they could go lower short term. We recommend owning funds or broad-based ETFs. We don’t try to pick individual winners.

Many people are very pessimistic about trade and tariffs—they’re worried about contagion. All you need is some good news there, and you see probably a very rapid rebound and a much better price performance.

FORTUNE: John, which companies are adapting best to the onslaught of technological disruption?

LINEHAN: In large-cap value land, it’s very difficult to find companies that are disrupters, and we have plenty that are disruptees. But oftentimes, the market is unwilling to give these companies the benefit of the doubt or truly understand the business model.

UPS(UPS) is a company that’s faced a lot of dislocation around transitioning from a ­business-to-business to a business-to-­consumer strategy. But I think we can all agree that the demand for delivery of packages is only going to increase. With UPS, the issue isn’t so much a volume issue, it’s a pricing issue. And we think that’s correctable.

If we move into electrified vehicles, it is going to transfer demand for hydrocarbons from oil or crude oil to natural gas. And moving those hydrocarbons is going to become a critical element of the energy storage and battery part of this story. TransCanada(TRP), a midstream pipeline company that is one of the leaders in transporting natural gas, is trading at 10-year lows on many valuation metrics. The market’s worried about the money it has borrowed. But there is a unique opportunity to continue to grow.

FORTUNE: And Ed, this is a big focus of yours.

SIM: Technology is the underlying theme driving some of those choices. Like Walmart(WMT), for example: I thought they did an amazing job of buying a technology entrepreneur in Jet.com. And they’ve acquired four or five companies since then to combat Amazon.

Reed Young for Fortune Magazine

“Today, we’re recognizing that a positive emphasis on social issues has an impact on performance.” Lori Keith, Parnassus Investments

They didn’t have the hubris to say, I’m going to do this myself. The smarter companies are going to be the ones that say, How do I partner with the ecosystem? How do I go out and buy the technology and the engineers that I need to have to drive this disruption?

That’s why the other area we’re very excited about is investing in software for engineers. If you think about it, every Fortune 500 company has to be a technology company, or you won’t be in the Fortune 500 in five years. How do you actually drive that innovation? You’ve got to buy, or you’ve got to build software.

Pivotal Software I think is super interesting. They are driving a multi-cloud platform so that large banks and insurance companies and Fortune 500s can actually deploy their software as quickly as Google does. And so if you build on that foundation, and you hire the engineers, you can iterate and keep up with your technology competition.

LINEHAN: Walmart took a very long-term horizon. When they made the investment in Jet.com, they were willing to take numbers down, incur the wrath of the market in the short term to position themselves better in the longer term. Some companies have the ability to do that with good governance, and some don’t.

SIM: It’s funny, I was talking to a large grocery store chain, a public company, and they said it really bothers us that every time Amazon announces something, let’s say, like a next-day delivery service, their stock goes up by 3% to 4%. And if we tried to do something, our stock would go down by 3%, 4%, 5%.

WARNE: Super-frustrating. On the subject of disrupted industries, I was going to talk about Disney(DIS). It’s extraordinarily well positioned as they gain scale with the 21st Century Fox acquisition, as well as the fact that they’ve got the entertainment business with their theme parks. Together that gives them the cash flow to be able to make that transition, to be able to fund over a longer time the transition to compete at scale in digital media.

To Ed’s point about retail, I wanted to talk about Dollar General(DG). So we’ve got Amazon on the rise—everybody thinks that retail is dead. But think about the fact that this company, which many people in an urban area have never been to, is mainly rural: It’s 15,000 locations across the country. Half of their business is in cash. And because they’re in rural areas, you’re not in a situation where you’re waiting a few hours for online delivery; you’re getting delivery over three days.

And about three-quarters of what they sell is staples. That means people who are repeating their purchases, and they may not have the income to do Amazon Prime and get free delivery. So yeah, you can think about areas of their market that will be transformed. But we think they really have something that’s pretty sustainable against the Amazon-type model.

WOOD: One of our nightmares is to have one of our companies acquired by a behemoth. But there have been instances in the health care space, in the last year or so, where for the good of mankind, we think acquisition is great. Kite and Juno had expertise in CAR T therapies, immuno-oncology, basically unleashing an individual’s own immune system against cancer.

So Gilead(GILD) bought Kite. I wasn’t happy in the beginning, but when I saw their global scale, I said, They could really serve this huge, unmet need very quickly. And then Celgene(CELG) bought Juno. Neither of those stocks’ prices reflects how important this is. We think CAR T technology is going to be at least a $250 billion revenue opportunity globally.

I don’t think investors in those more traditional biotech stocks understand what a breakthrough this therapy is and how quickly this is going to impact their bottom lines.

FORTUNE: Big Pharma has a problem it shares with a lot of big businesses—a trust problem. Look at Facebook: Its stock price is down about 30% since the summer, based on concerns over data privacy and breaches. Lori, how do you factor a brand’s public image into an investment decision?

KEITH: It’s something that we spend a lot of time trying to assess. It’s really intrinsic to the quality of the company and their products and services and how they’re relating to their constituents, all the stakeholders, and their consumers directly. When you have companies that can establish that trust and brand, that gives you pricing power.

So a company like Clorox(CLX), they’ve done a great job in terms of delivering products and brands that consumers trust, and that enables the company to capture a disproportionate share of the profit pool in its category. They’ve been big on recycled packaging. Things like that really relate to their customers’ desire to buy green products. And that’s allowed them to have pricing power.

SIM: We’ve been investing in GDPR-related companies [that are helping meet Europe’s new data privacy standards], companies like BigID, which came out of nowhere and has already raised $40 million. They’re helping large enterprises figure out what private data they have, where it’s located, and how they manage it and secure it. This is prepping for the time when we as individuals should be able to say, “Where’s my data—what do you have on me?” And then, “I have the right to be forgotten. Remove me from all of your lists.”

I think in the next five years, there’s an opportunity for some of these tech companies to lead the charge and be the company that says, “You own your data, and I’ll pay you to get access to the data.” And I’m seeing hundreds and hundreds of companies try to use the blockchain and other technologies to disrupt what’s already out there. It’s going to happen, for sure.

KEITH: We really do live in this glass-door environment. Everything is out in the open in terms of feedback from customers directly that you can obtain access to.

WOOD:Facebook, Google, Twitter, these are data aggregators. They actually do own the data, use the data. I’m looking around the corner at how these data aggregators are going to be disrupted because people are really unhappy. You can see it in the ranking of brands. That’s one of the best indicators of how well or poorly a stock is going to do. If it’s moving up, it tends to be associated with an appreciating stock. Facebook has moved down dramatically. And it is going to be difficult to recover.

LINEHAN: When you lose public trust, then a natural residue of that will be regulation. The financial industry lost the public trust after the great financial crisis, and the result was Dodd-Frank and a tremendous amount of regulation. Right now, there are over 125,000 different regulations associated with the financial industry. There are just about 27,000 with the technology industry. We think that one of the real risks within technology is the emergence of a stiff regulatory environment.

FORTUNE: Panelists, where do you see the greatest risks and the greatest opportunities for 2019?

WARNE: We’re going to see more market volatility, and the greatest risk is that investors will do the wrong thing. They won’t take the long view that all of us have been talking about, and they’ll sell at the first moment of stocks going down.

I see the greatest opportunity outside the U.S. Valuations are high here; they’re a lot lower in the rest of the world. We could all give a long list of things that we see going wrong, but all you need is a few things going right, and the rest of the world does better. I think that’s very likely to happen next year.

SIM: Cybersecurity risk for public companies is absolutely massive. I think there’ll probably be some companies out there in the next year that get hacked and lose tremendous value.

On the opportunity side, I’m a huge, huge believer, no matter what economic cycle we go through, that Fortune 500s need to invest in software. So I’m all about picks and shovels: investing in the companies powering the developers. Look at Microsoft(MSFT) buying GitHub. Look at Atlassian(TEAM), Twilio(TWLO), SendGrid(SEND), all those types of companies I think are going to power the next wave of companies fighting off the Amazons of the world.

WOOD: Since 2008, we’ve seen $2 trillion of inflows into bonds and bond funds, and we’ve seen roughly $200 billion of outflows from equity. I think the risk is not being in stocks. And with all the risk aversion out there, the good news is, we are not in a bubble by any stretch of the imagination.

But even those who are in stocks right now and feel really comfortable, if they are in passive indexes, those indexes are piling up with value traps. So I really think being exposed or getting a hedge against that with exposure to innovation in the public markets is important.

Greatest opportunities? Of course you know I’m going to say “disruptive innovation.” But I do think, again, China. Individuals in China do not expect privacy. It’s a different culture. So from an A.I. point of view, they are going to be able to do things that we cannot.

LINEHAN: I think one of the big risks for 2019 is going to be geopolitical. We clearly live in a world that is not safe. We are seeing the heated rhetoric increase, and I believe as a result there is a greater likelihood of a policy error occurring.

Another risk is the potential for inflation. We’re going to be running a trillion-dollar deficit. Consumer and government debt is close to all-time highs. But the cost of debt service is not all that high because we have very low interest rates. If you see interest rates creep higher, the impact on the economy at some point could be very injurious.

As a value manager, I always think of opportunity in the context of what’s cheap. And right now there’s very little that’s actually that cheap. So I’d say finding select companies that have underperformed—where we feel comfortable with the business model and with the ability to withstand secular pressures—that would be a good place to start.

KEITH: We’re certainly into the latter stages of a late market cycle. We’re starting to see inflation—not necessarily picking up dramatically but starting to pick up. We’re seeing inflationary costs around wages, and oil prices are rising. So all those things raise concerns about earnings growth slowing. We’ve only been in one part of the market cycle since 2009, and people forget that we do still have cycles.

We want to make sure that we’re investing in quality companies that have wide competitive moats, increasingly relevant products, and services that play into technological trends. And well-managed companies with very socially responsible profiles are going to be able to outperform over the long run.

FORTUNE: Thanks, all.

Three Things Investors Should Feel Excited About for 2019, and Three Things They Should Worry About

GET EXCITED ABOUT…

Tech Upgrades Big companies’ competitiveness depends on how quickly they adapt to technological change. That trend should boost small companies that provide software and related services to bigger clients (Vonage, Pivotal Software) and big ones making smart tech acquisitions (Walmart).

Cleaner Living Companies that shrink their own and other people’s environmental footprints (Clorox, Xylem) increasingly command greater customer loyalty and pricing power. And demand for lower- and zero-carbon energy will help many companies (Tesla, TransCanada) outperform.

China Trade tensions and geopolitics have driven down China’s markets, but the country’s tech giants (Baidu, Tencent) have promising outlooks. And the emerging markets whose economies revolve around China’s could get a big boost from good news.

WORRY ABOUT…

Inflation A strong economy has a downside for investors: Upward pressure on wages and rising fuel costs mean higher expenses that threaten profits.

Bubbly Stock Prices Even after this autumn’s selloff, the price-to-earnings ratio of the S&P 500 stood above 22. Companies with great growth potential can justify those kind of prices, but many can’t clear that bar.

Data Disasters The abrupt plunge that Facebook’s stock took this year offers a cautionary tale about the backlash that can occur when customers lose trust in how a company handles data. Cyber­security lapses and privacy problems are likely to create plenty of other headaches for investors in 2019.